Question 1.

 Companies often change colour, package, design, and advertisements for their products. Is it
because the companies wish to counter the impact of diminishing marginal utility. Explain with suitable
examples that you may have witnessed, heard, or read. Explain the law of diminishing Marginal Utility.
ANS:

Utility is an economic term used to represent satisfaction or happiness

Marginal utility is the customer experience that makes the customer want to go for more of the same
product or service.

We come across a new variety of goods and services everyday, every increase in the consumption of a
good or service, it reduces the marginal utility as compared to past experience of the same. This is called
the law of diminishing marginal utility.

For example –
Consumption of Coffee gives us more utility, but after having 3-4 cups of coffee, we may not enjoy/excite
the same utility of having previous cup though total utility is more but marginal utility will reduce.

To counter the impact of diminishing marginal utility, companies often change colour, package, design
and advertisements for their products to give customers the desirability to repeat or upgrade their
products or services.

Examples:
Companies are continuously working to update their product designs. Maruti Suzuki Swift launched in
India in 2005 with total metal body in few basic colours like white, silver and black .
Maruti Suzuki Swift has seen three generations in India so far with multiple updates along the way.

nd
After 6 years of their launch, they upgraded to 2 generation and the new Swift had a sleeker design,
the headlamps were stretched back, and the increase in length and width helped make the Swift look a
lot new and sporty.
 
Exterior updates were significantly amazing, changes on the inside were revolutionary. All-grey theme &
all-black scheme on a completely new dashboard design. The quality of materials used as well as the
cabin space had major upgrades, though the Swift was a tough competition to its competitors.
They gave more vibrant and eye catchy colors which had a very refreshing feel and look to the new swift.
The third-generation Swift was introduced in early 2018. It is based on Suzuki's latest HEARTECT platform,
which is claimed to be compliant with all mandatory safety regulations. According to the carmaker, the
current Swift is the safest hatchback so far. The new Swift also gets tons of modern features which has
paved way to target younger customers and increase the car's desirability. These features include
projector headlamps, LED daytime running lights and gunmetal alloy wheels. Its design is clearly an
evolution of the previous model's, which helps in retaining its popular brand image while simultaneously
giving it a fresh new look.
Companies are continuously working on new advertisements to retain their customers and to increase
their customers
Coca-Cola has been continuously changing its advertising patters and messages time to time to reach out
to people and sustain in the market as leaders. They have connected Coca-Cola with feelings and
occasions and using different brand ambassadors and non-famous models to reach out to all masses here
are the examples:

Share a coke was a very effective advertising strategy they used to increase the desirability of the
product. They released coke bottles and cans with printed names like family, mama, papa, etc.
Open happiness was their tag line for a very long time and till date.

This is an old advertisement of coke using Amirkhan to reach out to the crowed as he was a superstar
among people.
Here is the latest advertisement of coke, here they have used new faces to reach out to common masses
and to connect better.

All the above things are done to counter the impact of diminishing marginal utility.

Question 2.  Any change in product price done by the company will require the company to assess the
impact on its quantity demanded. Competitor price changes can also influence the demand of the
product of the respondent company. This is because of cross-price elasticity. A change in our income
tends to make us less price sensitive. Explain the concept of Elasticity - own price elasticity, cross-price
elasticity, and Income elasticity with help of suitable examples.

Ans:

Elasticity is a concept which helps to identify / measure the responsiveness of a variable with other. A
product is said to be elastic if the quantity of demand changes more than proportionally when its price
increases or decreases.

Types
1. Income
2. Price
3. Cross

Own Price elasticity – It shows the responsiveness of a quantity demanded to the change in price, as
simple as quantity supplied is directly responsive to the price change
Ex: when the price of soap goes up, you won’t necessarily reduce demand. You will find an alternative soap
according to your income. Therefore, the smaller the proportion of income you spend on an item, the
more inelastic the demand.

Cross Price Elasticity – It is also called as cross price elasticity; it is calculated by taking percentage of
change in quantity by the Percentage change in price.
EX- McDonald’s may increase the price of its products by 20 percent. In turn, customers would prefer to
go to Burger King as they may offer a cheaper meal. Consequently, Burger King sees a rise in demand.
Items in such cases which have strong substitutes have higher cross elasticity of demand.
Income Elasticity – The percentage change in Quantity demanded divided by the Percentage change in
Income, it tends to be mostly positive, (i.e.) income increase will directly proportion the quantity ordered.
Ex – The income of the individual goes high the luxury or comfort chosen by an individual will be high
end, like investing on high end luxury HD television

Question 3. Let’s assume you are planning to buy a new car. Explain the demand determinants. Which of
the demand determinant will have higher weightage and why?

The various factors which effects the demand of a product are called Demand Determinants Below are
the determinants which influence the demand of a car

Price of the car

Income and interest of Customer
Price of substitute
Safety
Service Support
Power and driving experience

Above are few demand determinants and in addition to above there are various demand determinants
like:
 Space
 EMI options
 Design
 Regulations
 Availability

Companies are continuously promoting their products on by highlighting these demand determinants
through Advertisements, road shows, brochure to increase their sales and got the customer attention.
I’m more interested in Maruthi Ciaz because of following demand determinants:

As price in its segment, features, mileage, electric-hybrid technology, space and design will have the
higher weightage while choosing a car,
  Ciaz is best in price in their segment of Sedan compared to more expensive Honda City or
Hyundai Verna
 Best in safety feature
 Good in design
 Good in interior features
 Having Wider Distribution network and service network
 Certified/Awarded by different 3rd parties
 Hybrid technology with makes the car stand out with practical benefits like mileage and
drivability.
 Best in class mileage 27.5KM beating all the competitors in this segment for a much competitive
price.

Question 4. Assume food delivery firms like Swiggy are making huge profits. Higher profits may attract
the entry of new firms into the food delivery industry. Explain what could be the impact of entry on the
firms and the industry as a whole.  

The average cost of rendering the delivery service for the existing players 
Price/commissions that they charge from their customers 
Profitability 
How would the break-even point impact due to entry of new firms? 

Ans:
a. Swiggy enters the market by differentiating themselves as app based food delivery service by
making ease of ordering and choosing from different restaurants and quick delivery and make
them as monopolistic competition for some time and enjoys the good profits for short time.
b. As the more number of firms enter into the competition, and it became perfect competition
market, companies has to invest more to sustain in the market in terms promoting, quick service
and offering discounts to customers makes and hence average cost of firms increases to AC1.
And also as the competition increases, price/commission they charge from their customers will
reduce, which in turn effect the profits they operate and now, average cost of the firm and
operating price both are becomes equal and hence firms earns zero economic profits.

c. Q is the number of customer (Quantity) that can serve to get the profit where their marginal cost
is equal to their marginal revenue and they could get at the average cost of AC and operating at
the price of P and enjoying the profits As Swiggy is making profits and these profits attracts
the other companies like Zomato and uber deliveries to enter into the food delivery industry.

d. As the firms reach break-even point at where their total cost is equals to the total revenue. Total
Revenue = Total Cost*Q = TFC+TVC = TFC+AVC*QQ(P-AVC) =TFC 0r Q = TFC/(P-AVC), Where P-
AVC is Contribution margin. Due to entering the new firms, Average Cost has increases and
profits are coming down its take lot of time and efforts to reach the break-even point.